The Real Deal New York

“It’s like jungle animals surrounding a dead animal”: Inside the world of mezz debt

The more lenders that get into the mix, the more complicated it gets
August 04, 2017 02:55PM

Previous rendering of 3 Sutton Place

A mezzanine lender can be a developer’s knight in shining armor, pumping additional money into a project when the senior loan won’t quite cover costs, and when a developer is unable or unwilling to put in more equity.

But the mezz lender can also be a Trojan Horse, with the power to initiate foreclosure proceedings and take over the project if a borrower defaults. It’s one of the reasons that more and more deep-pocketed developers are getting into the mezzanine lending game: If the borrower is in good standing, they make a decent payday from the yields. But if the borrower can’t keep up, the lender gets control of a valuable property on the cheap.

“I will almost guarantee you any developer that is making mezz loans is eyeing that [property],” Mark Fogel, CEO of Acres Capital, a bridge and mezzanine lender, told Commercial Observer.

But for a senior lender, having a mezzanine lender with development experience in the mix can be a good thing.

“We are brought deals from mezzanine investors, who say ‘look, we think this deal will be fine, we know the market, we know the asset, and if anything goes wrong, we’re the owners,’” Citigroup Global Markets’ Marcus Giancaterino said in September. “They may actually be our customer, and the borrower will not.”

But mezz lending isn’t for amateurs. It can create hairy situations in which the mezz lender is bleeding money while a property dispute is being worked out. At Two Herald Square, for example, the Paramount Group, which holds the mezz debt on the leasehold, is paying up to $100,000 a day while the family-run firm Sitt Asset Management, which owns the building, dukes it out in court, according to CO.

The more mezz lenders in the mix, the more complicated things get. “There’s a lot of strategizing as to how to move forward with these things,” real estate attorney Stuart Saft told CO. “It’s like jungle animals surrounding a dead animal.” [CO]Hiten Samtani